WITHHOLDING TAX ON RENTAL INCOME

The finance act has always mandated that tax should be withheld at source on rents being paid to landlords. Historically leases were either personal leases, signed between the individual tenant and the landlord or between a company taking the property on rent for the tenancy of an executive and a landlord.

In the past, in the case of company leases, the tax was withheld by the company at the rate of 10 % when dealing with landlords who were resident in India and 20 % in case the landlord was non resident in India. In the case of personal leases, this tax was usually never withheld and full rent was paid to the landlord.

As per Finance Act, 2017, “TDS ( Tax deduction at source )  on Rent” under section 194-IB is  now liable to be deducted by Individuals where themonthly  rent being paid to a resident landlord exceeds ₹ 50,000 per month.  The revised Section 194-IB of the Income Tax Act, 1961 now states that for all the rent transactions with effect from June 1, 2017, the tenant must deduct  tax at source at the rate of 5% and such  tax should be deducted by the Tenant/ Lessee/ Payer of the property at the time of making payment of rent (to Landlord / Lessor/ Payee). Tax so deducted should be deposited to the Government Account immediately or before 31st of March of the same financial year through any of the authorized banks and their branches.

The TDS so deducted shall be paid to the credit of the Tax Department within a period of thirty days from the end of the month in which the deduction is made and shall be accompanied by a challan-cum-statement in Form No. 26QC.

Every individual person responsible for deduction of tax under section 194-IB shall furnish the certificate of deduction of tax at source in Form No.16C (TDS certificate) to the payee within fifteen days from the due date for furnishing the challan-cum-statement in Form No.26QC.

For the purposes of this section, “rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or building or both.’.

Points to be remembered by the Landlord of the Property:

1. Provide your PAN to the Tenant for furnishing information regarding TDS to the Income Tax Department.

2. Verify deposit of taxes deducted by the Tenant in your Form 26AS Annual Tax Statement.

3. Insist on obtaining Form 16C from the tenant which has been downloaded from TRACES website only.

Impact on Foreigners and expatriates renting properties in India

In majority of the cases, Expatriates usually rent property for their tenancy through a company lease, where in the liability to withhold tax becomes that of the company / employer. However in recent times more and more expats are tending to rent properties on personal name and hence personal leases as these are considered more tax efficient. Unfortunately the tax at source was not being recovered by the government in cases of such personal leases and where rents were as high as 200,000/- to 300,000/- rupees per month.

With the change in the Finance act, all personal leases where the monthly rent was more than 50,000/- per month have now been controlled through the tax withholding at source of 5 % of the monthly rent. This will increase the personal  administrative efforts of individual foreigners who have rented properties for personal use through a personal / private lease and the below directions should be considered by all persons executing a personal lease in India.

Points to be remembered by the Tenant of the Property:

1. All individuals paying monthly rent to a resident in excess of Rs. 50,000 are liable to deduct TDS under section 194-IB

2. Deduct tax @ 5 % from the rent payment made to the Landlord.

3. Collect the Permanent Account Number (PAN) of the Landlord and verify the same with the Original PAN card.

4. PAN of the Landlord as well as that of the tenant should be mandatorily furnished in the online Form for furnishing information regarding the rent.

5. Do not commit any error in quoting the PAN or other details in the online Form. For the purpose of error rectification, you have to contact Income Tax Department.

6. Download and furnish TDS certificate in Form 16C from TRACES and issue to the Landlord / Lessor/ Payee within 15 days from the due date of furnishing of the challan-cum-statement in Form 26QC.

7. If the Landlord / Lessor/ Payee is a non-resident, liability to deduct TDS is then taken  under section 195 of the Income-tax Act, 1961